A recent article in the Sunday times reported as follows:
“a growing number of SME owners are looking to sell up ahead of next year’s general election. Under the present government’s ‘Entrepreneurs’ Relief’, business owners who sell for a profit are taxed at 10% on capital gains of up to £10m, compared with the normal capital gains rate of 28%. However, there have been suggestions the tax break will be made less generous or scrapped entirely if Labour regains power.”
So, what is ‘Entrepreneurs Relief’, what impact could a scrapping of the relief have and what can we do to help?
What is Entrepreneurs’ Relief?
Entrepreneurs' Relief is a reduction in the rate of Capital Gains Tax offered to owner-manager business owners who have increased the capital value of their trading company at the time of a sale of the business or company. The reduced rate of tax on the capital gain is available, provided that certain conditions have been met, such as the company trading for at least one year. When the owner receives a capital gain on their investment in the company, the gain is charged at the Entrepreneurs Relief rate of 10%. The important thing to remember is that the relief is on the capital increase in value of the investment in the company and not on the income generated by the company. As a simple example, if the shareholders invest £100,000 in share capital and the company buys a business for that amount, but after several years’ hard work, the shareholders sell the company for £1.1m, in simple terms they have increased the value by £1m and will be taxed on that increase when it is realised.
Although the general principals behind Entrepreneurs' Relief are relatively simple, there is of course a lot of detail to avoid abuse. Your accountant can likely also provide valuable tax specific advice on this area.
What impact could a scrapping Entrepreneurs’ Relief have?
Looking at the simple example above, if a business owner were to dispose of the assets of a business after cessation of trading and he achieved a gain of £1m, very simplistically, without the relief, working on the CGT rate of 28% the tax payable would be £280k. However, with the benefit of the current Entrepreneurs’ Relief, the capital gains tax charge, before any personal allowances, would be at 10% totalling £100,000 rather than 28%, which results in a tax saving of £180k. The maximum total gain to be taxed with the benefit of Entrepreneurs’ Relief is £10m and therefore the potential tax saving increases to up to £1.8m, a significant sum. Withdrawing or reducing the entrepreneurs relief could have a significant impact on the amount of tax payable by a business owner who sells, perhaps for retirement.
What can we do to help with Entrepreneurs’ Relief?
It is important to ensure that the funds received by the shareholder are received as capital and not income, in order that it is subject to CGT and therefore eligible for Entrepreneurs’ Relief. When the company is no longer required, a Members Voluntary Liquidation (ie a Solvent Liquidation) can be used as a way to distribute the surplus funds in the company to the shareholders as a capital distribution. The individual will pay CGT, which in a lot of cases would be lower than Income Tax on dividends, and can also utilise Entrepreneurs’ relief to lower the tax bill further. The costs of liquidation need to be proportionate; otherwise the tax savings could simply be spent in professional fees.
QuickCap has been designed as a low cost capital distribution process. It is essentially a very low cost solvent liquidation, with a fixed fee of only £2.5k but which could save tens of thousands more in tax. More details on QuickCap can be found in a recent blog or by going to our QuickCap website.
If you are planning to sell your business or close down a solvent company and want to ensure that you can benefit from the tax relief, make sure you ask your accountant about using Quick Cap to minimise your tax liability and maximise the cash in your bank account.